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http://dx.doi.org/10.7232/JKIIE.2013.39.5.429

Case Study : A Real Options Approach to an Overseas Project Finance Deal  

Byun, Jinho (College of Business Administration, Ewha Womans University)
Choi, Moon Sub (College of Business Administration, Ewha Womans University)
Publication Information
Journal of Korean Institute of Industrial Engineers / v.39, no.5, 2013 , pp. 429-439 More about this Journal
Abstract
The Korean Veterans' Pension Fund has previously pre-purchased Gibril Tower on Business Complex in Dubai, UAE, via a project-financed construction investment. Although the property is near completion, the investor syndicate's attempt to debt-finance due arrears was foiled in Dubai central bank's credit control of real estaterelated loans. Accordingly, the investment coordinator offered an additional capital injection, a collateralized leverage, and a maturity extension to the syndicate. If the syndicate rejects the offer, they may risk a nearcomplete capital loss and a possible default of the main contractor. Otherwise, the syndicate may still face uncertainties regarding interest receivables, principal re-payment, foreclosure, economic recession in Dubai, and the Islamic bond bill in the Korean Parliament. A possible exercise of the latter option may be due to the agency-prone nature of pension fund managers. Given these qualitative risk factors as at April 1, 2011, a real options approach-implied optimal decision suggests an extended and complete cash augmentation into the project finance deal.
Keywords
Project Finance; Overseas Property Investment; Real Options;
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